JoanE. Solsman

Office Depot Inc.
ODP, +0.25%
and OfficeMax Inc.
OMXS30, +0.76%
both unexpectedly improved core profit in the third quarter even as falling sales continued to plague the office-supplies sector, a struggle that could be more pronounced in Staples Inc.'s
SPLS, +2.72%
bottom line next week.

The two smaller office-supply chains are already well into turnaround strategies that now are keeping profit up while sales are falling. On the other hand, Staples--the No. 1 retailer in the space by sales--only recently amped up its response to persistently soft demand after previously opting for nips and tucks.

Shares rose across the sector. Office Depot shares jumped 20% to $3.02 and OfficeMax stock climbed 17% to $8.69. Staples shares rose a more modest 2.1% to $11.81, also benefiting from a wide market rally.

Executives Tuesday noted difficulties in the sector didn't get any easier in the third quarter, and in some cases, they got worse.

"The economy is not giving us any tailwinds and small business formation is weak," OfficeMax Chief Executive Ravi Saligram said on a conference call to discuss results. "Adding to these issues, we now face a sector weakness in technology."

OfficeMax, with a 2.1% drop in same-store sales overall, said the decline in technology sales was so steep it would slash its personal computer assortment by more than half to favor more tablet choices. Office Depot North America's same-store sales decline of 4% was worse than it had expected because of weakness in technology, with computers and their accessories down significantly.

Citi Research analyst Kate McShane noted the comments about weak technology sales could be amplified for Staples, which has a greater mix of technology products than the likes of Office Depot.

Meanwhile, Office Depot's international sales fell 12%, 4% in constant currencies. That's slightly better than the second quarter, but Office Depot has strong businesses in such places as South Korea to somewhat offset ongoing poor sales in Europe.

Staples's international operations are centered in Europe and to a lesser extent Australia following its 2008 acquisition of Corporate Express. Tuesday, Office Depot said its sales in Europe dropped in low-single-digit percentages in both its contract and retail businessness, excluding negative effects from foreign exchange.

Anthony Chukumba, analyst for BB&T Capital Markets, said what Office Depot and Office Max are doing--driving profit-margin improvement while sales battle a persistently challenging macroeconomy--is a "perfect blueprint for what Staples needs to do."

"The mistake that Staples has been making is they haven't been reacting to the environment as these guys have," he said.

In September, Staples it would be more aggressive about closing stores in the U.S. and Europe and planned to sell its European printing business and combine business lines after its second-quarter profit slumped 32%. It will report third-quarter results Nov. 14.

Tuesday, Office Depot posted a third-quarter loss of $61.9 million, compared with a year-earlier profit of $100.9 million. However, the latest results included charges and write-downs, while the prior-year period had tax benefits.

Excluding them, earnings in the latest period were six cents a share versus a breakeven bottom line a year earlier. Sales at Office Depot decreased 5.1% to $2.69 billion, or about 3% excluding currency effects.

Analysts surveyed by Thomson Reuters expected a profit of one cent a share and revenue of $2.73 billion.

Meanwhile, OfficeMax reported a profit of $433 million, or $4.92 a share, from $21.5 million, or 25 cents a share, a year earlier. Excluding a massive $670.8 million gain from extinquishing liabilities linked to timber notes backed by Lehman Brothers, earnings rose to 27 cents a share from 25 cents.

Analysts surveyed by Thomson Reuters expected 25 cents a share.

Revenue decreased 1.7% to $1.74 billion. In August, the company forecast top-line sales would be flat to slightly higher.

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